Yahoo Finance Interest rates: When will UK’s mortgage misery end?
1.8 million families face rate rises of up to 6% and even beyond as Bank of England struggles to stamp out inflation
The Bank of England decision to raise interest rate to 5% on Thursday will strike fear into the hearts of the 1.8 million households whose fixed rate deals are due to come to an end between now and the end of 2024. A major chunk of them are currently paying mortgages that were fixed at 2% or less, and there’s every sign that a remortgage will cost them a small fortune. What they really want to know is just how long the mortgage misery is going to last, and whether rates will still be at eye-watering levels when they’re hunting for a new deal.
Even before today’s hike, Moneyfacts figures showed the average two-year fixed rate mortgage had risen to over 6%. As a result, the Resolution Foundation calculated that anyone remortgaging next year would see their repayments rise by an average of £2,900 a year. For those with bigger mortgages the pain will be even more acute. Someone moving a 25-year £200,000 mortgage from 2% to 6.2% could find their monthly payment rising around £465 to £1,313. Our research shows that more than nine in 10 people would run into financial trouble with a rise of that size.
The bad news is that the market is fairly convinced that there’s more inflation in the pipeline, so rates will have to go significantly higher and stay there for longer. At the time of writing, the market was priced for the Bank of England interest rate to peak at nearly 6% in March 2024. This is a dramatic increase from the 5% it had pencilled in this time last month. If this comes to pass, the Resolution Foundation says we won’t see mortgage rates drop back to 4.5% until 2027.
Read more: Bank of England hikes UK interest rates to 5% to combat sticky inflation
However, this isn’t necessarily guaranteed. The fact that today’s hike was 0.5 percentage points rather than 0.25 was an effort by the Bank of England to deliver a sharper shock that it hopes will have more of an impact than slower, steadier rises have. If inflation comes under control more effectively than the market suspects, there’s a reasonable chance that not all of these rises will materialise. We will have to keep an eye on data emerging over the next week or two, because economic weakness, or signs of falling inflation, could persuade the market that rates won’t peak quite so high, which could depress mortgage rates.
Of course, on the flip side, if the coming weeks bring signs of sticky inflation, or more robust economic data, it could reinforce the market’s view that we’re set for more rounds of punishing rate rises, which would mean the mortgage misery could be here to stay.
Read more: Why the Bank of England may have to create a recession
If rates are still sky high at the point you need to remortgage, you still have options. It may be possible, for example, to extend the term of your mortgage for a period, in order to lower the payments. The FCA has issued new guidance which means you may be able to do this with your current lender without having to go through the full affordability checking process.
You could also consider moving to interest-only payments on a temporary basis. There will be an affordability test, and the FCA will want proof you are making plans for how to repay the capital. However, this proof can include a plan to revert to a repayment mortgage in the near future, so you can make a temporary change without having to upend your finances.
Because while there’s an awful lot for remortgagers to fear at the moment, there’s some comfort in the fact that rates rises may not be as bad as people think, and that even if they are, there may well be a way to stay on top of your payments until the mortgage misery eases.
Watch: How does inflation affect interest rates?
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